Things are looking good for the gold bugs these days. September and early October saw the (long awaited) break above $1,000. This past week saw the technical pull back to the breakout point, and Thursday was the turnaround day. Friday saw some very bullish candlestick signals in many of the gold stocks.
But one thing has been bothering many gold bugs. In 1933, the U.S. Government confiscated the peopleâ€™s gold. The Government even went into safety deposit boxes (in private banks) and took the gold out of them. This was done once. Perhaps it could be done again.
Actually, I find this fear to be alarmist. There were special circumstances which led to the confiscation of gold in 1933, a special legal situation unique to American history and which made the confiscation necessary if the New Dealers were to achieve their objective of taking us off the gold standard.
First, let us go back to a key event in American history. For those of you outside of the USA, this is still useful information because America was (and still is) the most wealthy country in the world, and its gold/silver standard played an important role in that accomplishment. As Senator Daniel Webster wrote early in Americaâ€™s history:
â€œMost unquestionably there is no legal tender and there can be no legal tender in this country, under the authority of this government or any other, but gold and silverâ€¦.â€ [as quoted by Chief Justice Salmon P. Chase, â€œSupreme Court Reports,â€ Legal Tender Cases, 12 Wall 586, Opinion of the Minority.]
The U. S. went on the gold/silver standard with the adoption of The Constitution in 1788. This was compromised on a few occasions but basically led to a stable currency for the period 1788-1933. This was the fastest growing economy in the history of the world.
The first compromise occurred during the War of 1812. The Federal Government did not abandon hard money, but the private banks outside of New England suspended payment of gold and silver and were allowed to get away with it. Essentially only New England remained on the gold standard for the duration of the war. In relation to this, it is only the New England militia who refused to invade Canada in 1812, and it was this fact which led to the American defeat.
The second compromise of hard money occurred during the Civil War. Lincoln was afraid that financing the war with a tax increase would make the war unpopular in the North. So he printed money to pay war expenses. This doubled the U.S. money supply between 1861 and 1865. The railroads were enabled to pay their debts (which had been contracted in gold) in paper money (greenbacks). For example, a $1,000 railroad bond, which had cost its owner 50 oz. of gold in 1860, could be paid off in 1865 for $1,000 in greenbacks, which were worth 25 oz. of gold. They borrowed 50 oz. and paid back 25 oz. It was stealing pure and simple, and the American railroads loved it. They tried to persuade the country to remain off the gold standard after the end of the war.
This was defeated when President Grant vetoed the pro-railroad legislation and Congress voted resumption (of gold) effective 1879. This shifted the battle to the legal arena. Many holders of railroad bonds brought suit arguing that the greenbacks were unconstitutional and that the railroads had to keep their obligation to pay in gold.
The Court which had to decide this matter should have been a Republican Court. Lincoln had had the opportunity to appoint 4 of the 8 new justices (one of them Salmon P. Chase, his former Secretary of the Treasury, who had issued the greenbacks). All he (or the Republicans who wanted to uphold his memory) needed was one vote from the old judges.
They didnâ€™t get it.
Not only didnâ€™t they get it but Chase regretted his action in issuing the greenbacks. He decided that it had been done in a war hysteria and that this precedent could not be allowed to stand. He broke with the Republicans and in Hepburn vs. Griswald (1870) joined the Democrats to uphold the gold standard by a vote of 5-3. (Congress had switched from using two metals, gold and silver, to just gold in 1873.) This set the precedent that the country had to be on the gold standard.
The Republicans, however, were the dominant political party, and they were determined to uphold Lincolnâ€™s memory. Forget what you learned in Civics class. The Supreme Court does not follow The Constitution. Neither does it follow precedent. Here it followed the big money of the railroad interests and their desire to cheat their creditors. One of the 5 judges of the pro-gold majority of Hepburn retired from old age, and Congress increased the size of the Court from 8 to 9. This gave President Grant 2 appointees, and he appointed two men known to be anti-gold. The new Court disregarded precedent and overturned Hepburn in The Legal Tender Cases (decided in 1871) by a vote of 5-4. The New York World, commenting on this decision, stated:
â€œThe decision provokes the indignant contempt of thinking men. It is generally regarded not as the solemn adjudication of an upright and impartial tribunal; but as a base compliance with executive instructions by creatures of the President placed upon the bench to carry out his instructions.â€ [As quoted by Sidney Ratner, â€œWas the Supreme Court Packed by President Grant?â€ Political Science Quarterly, Sept. 1935, pp. 343-58.]
Having lost his main battle, Chase (the good guy) retreated to seeing what he could salvage. He had understood that the railroads merely wanted to cheat their creditors. Beyond this, they were not interested in ideological points. Chase was, and he did everything he could to shore up the legal foundation for the gold standard knowing that the new majority would not bother to overturn it.
Chaseâ€™s most important decision in this regard was Bronson vs. Rodes, 7 Wall 229, decided in 1870. And this is the decision which played a crucial role in the gold confiscation of 1933. In Bronson v. Rodes (1870), the plaintiff had a written gold clause in his contract requiring payment in gold. Since very few people had such contracts in 1870, the railroads did not care if they lost that one. The Chase Court ruled:
â€œIt recognizes the fact, accepted by all men throughout the world, that value is inherent in the precious metals; that gold and silver are in themselves values, and being such, and being in other respects best adapted to the purpose, are the only proper measures of values; that these values are determined by weight and purityâ€¦A contract to pay a certain number of dollars in gold or silver coins is, therefore, in legal import, nothing else than an agreement to deliver a certain weight of standard goldâ€¦the tender must be according to the terms of the contract.â€ [ U.S. Supreme Court, Opinion of the Majority, Bronson v. Rodes, 7 Wall 229 at 249, 250, 252.]
This was an extremely important opinion. It meant that future creditors could protect themselves from another depreciation of the currency by insisting on a gold clause in their contracts. If they had a gold clause, they were effectively on the gold standard, no matter what happened to the rest of the country. Lawyers went over these two Supreme Court decisions (Bronson v. Rodes and Legal Tender Cases) after 1871, and recommended gold clauses to their clients. Gradually gold clauses became very widespread in American business.
So when the New Deal took over in 1933, they faced the fact that, even if they abolished the gold standard, it would not work because now, unlike 1870, most everyone had a gold clause. It is for this reason that the New Deal anti-gold measures included a ban on the ownership of gold coins, a ban on gold clause contracts and the invasion of bank safety deposit boxes.
Quite frankly, it is unlikely that a modern government would do the same thing for the simple reason that they do not need to. We are already off the gold standard. Remember that paper money is theft. There is always a group (the paper aristocracy) who wants to steal wealth from the people by arranging things so that they are the beneficiaries of the printing of money. Now the paper money system is well established and firmly in place. There is no need for measures which will alarm the general public. At the present time, it is only the gold bugs who realize the evil of paper money and who are acting to protect themselves. But we gold bugs are only a small minority. (Notice that the one time that both prices and pro-gold sentiment were increasing sharply, 1979, the establishment turned off the money spigot and suffered through a period of tight money and credit (1979-81) in order to prevent the gold bugs from becoming more popular.)
So you do not need to worry about the Government stealing your gold. They donâ€™t need to. They already steal the wealth of the naÃ¯ve (anti-gold) majority. This majority believes their lie that the Government is robbing from the rich to give to them. They keep getting poorer and poorer, and they canâ€™t figure out why. And they keep re-electing the politicians who victimize them.
However, this does bring up an interesting speculation. Both gold ownership and gold clauses have been legalized in the U.S. (in the 1970s). This raises the question as to whether gold clause contracts could be made, as in the 19 th century, on the precedent of Bronson v. Rodes. One problem that such a project would face is that the old American double eagle coins (approximately one ounce) now have a numismatic value and thus are not suitable for using as currency. To solve this problem, Congressman Ron Paul championed the (new) American eagle gold coins (exactly one ounce) in 1986. It was passed in the Senate by unanimous vote and in the House with a very small dissenting minority. A further advantage of the new Eagle coin is that language accompanying the bill states specifically that the coin is intended to be used as money, is legal tender and is not merely an item for collectors.
For example, suppose you buy some real estate and intend to hold it for 10 years. You have the choice to pay either 200,000 dollars for the property or 200 ounces of gold (in American Eagle coins). At the end of the 10 years, the value of the U.S. dollar has fallen in half. All real estate, quoted in dollars, has doubled. But the price of your property in gold is still 200 ounces.
Along comes the Internal Revenue Service and says, â€œSir, you have made a handsome profit on your real estate. You bought it for 200,000 dollars and sold it for 400,000 dollars. Here is your tax bill. You, however, reply, â€œI did not buy the property for dollars. I bought it for ounces. I paid 200 ounces, and I sold it for 200 ounces. I made no profit at all. My house did not go up; your dollar went down. But since I did not use your dollars, what does that have to do with me?
Or take the following case: A man buys a life insurance policy on himself for his wife to provide security for her should he die. Since this purchase was made back in the old days when the dollar was still connected to gold and had some value, the insurance was in the amount of $100,000. Today, however, if his wife puts $100,000 in the bank, it will earn $125 per year (1/8% interest). And that is not the kind of protection he had in mind. What he needed to do was to buy insurance denominated in gold ounces. As the paper currency depreciated, the gold currency held its value.
A possible difficulty with the use of the Eagle coin in this way is that Congressman Frank Annunzio, Chairman of the House Banking Committee, illegally slipped a dollar denomination onto the coin (although both House and Senate versions of the bill specified only an ounce denomination). This muddies the waters and raises a question as to how some future judge would rule.
What is wrong with the economic establishment today is that it raises its capital by having the central bank create money out of nothing. In effect, our governments are robbing us and giving to them. It makes money, not by creating wealth, but by going into debt. The more debt the more they make. This was the cause of the enormous profits made by Wall Street in the early years of this century. The problem with this system is that conditions change. Their high-risk strategies which make lots of money in the early part of the cycle cause them to go belly up in the late part of the cycle. The last time this happened the Government admitted that its function was to rob from the common people and give wealth to these powerful interests. It argued that they were â€œtoo big to fail.â€ Well, they got so big because the Government stole wealth from us and gave it to them. They never produced any wealth. And the whole purpose of Bernankeâ€™s ultra-easy credit policy of 2008 was to steal more from us and give it to them.
The system cannot continue as it is going. The stealing must either progress to the point that it destroys our society or it must stop. In 4 th century A.D. Rome, they chose the former path. People stopped using money; the society reverted to barter, and the economy of western Europe collapsed. The barbarians swept across the Empire, and millions of people died of war, plague and famine.
My name is Howard S. Katz, and I have a different perspective on most economic issues from anyone else you will read. I publish a fortnightly newsletter on the markets called the One-handed Economist ($300 per year). I was a gold bug from 1965 to 1980. Then I was a stock bug from 1982 to 2007. Now I am a gold bug again. I look at the big picture and have one of the best records of any economist in the country. If you are interested in subscribing to my newsletter, then please visit, www.thegoldspeculator.com. You might also be interested in my blog at www.thegoldspeculator.blogspot.com. This weekâ€™s blog is an analysis of global warming and also examines the philosophical issue known as Pascalâ€™s wager.
Thank you for your interest.
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